Impact investors have a lot going for them. They’re more likely to be educated and have a certain amount of privilege that allows them to influence where capital goes; this means they’re able to take steps toward changing ingrained biases in the economy. With their money, they have the power to choose to benefit the greater good and pick ideas that reduce systemic biases. For some impact investors, this means putting resources toward changes in the venture capital structure.
Venture capital involves investing in a project with a substantial element of risk, typically a new or expanding business. In today’s financial world, venture capital investors are often seeking “unicorns”…businesses that cause disruptions in various industries and institutions. The current venture capital structure focuses on a large quantity of deals and quick exits via acquisition or IPO, with the hope of finding the next unicorn and hitting it big on at least one investment. Many venture capitalists take a majority stake in a business simply to tear it down to reduce costs and thus improve short term profits or push for overly aggressive growth and burn through money so fast that the business needs to raise even more cash in a vicious cycle.
Zebra Companies Defined
“Zebra” companies are businesses that seek to earn a profit and improve society without sacrificing one or the other. These companies encourage mutualism: if everyone contributes, everyone benefits. Their focus is on long-term sustainable growth, they create new and quality solutions to problems, and aim to achieve broad prosperity for multiple constituents rather than solely a large financial profit for their owners.
Zebra companies recognize that business is about more than money. Focusing on pure profit can have negative effects on the environment, the community and the world at large, and reinforces existing biased systems. Zebra companies practice the good behaviors that lead to good outcomes and avoid falling prey to practices other companies employ that promote toxic workplace cultures, hurt workers and skirt protective regulations. Zebra companies exist as evidence that businesses can be profitable, solve problems that are significant and meaningful in the world, and take steps toward repairing social systems.
The Perks of Zebra Companies
Zebra companies might borrow some of their processes from Wall Street and Silicon Valley, which can be considered unbalanced, but they try to support and get input from real people. Many of them are started by women and others from underrepresented communities, and develop their ideas and people from alternative sources to mitigate bias where they can. They support diverse teams to have as many voices making decisions as possible. The beneficiaries of zebra companies tend to be local communities, as they seek to find solutions to local problems first and then expand their reach as the business model is proven successful.
Zebra companies have a “win-win” worldview and support investors/owners as well as employees with policies such as revenue sharing, dividends, and employee stock ownership. The Zebra systems also support entrepreneurial growth in a way that doesn’t involve consolidation or acquisitions by larger companies.
The Challenges Facing Zebra Companies
Of course, everything a zebra company can do is affected by whether it can survive in the marketplace…something that’s challenging for a lot of them. Zebra companies are intentionally created and never come about by accident, and the current system doesn’t support them as they are incepted or try to grow.
Part of the problem is there isn’t enough proof of success for skeptics. Due to this relatively new approach, many zebra companies have yet to survive long enough to become financially successful or socially celebrated, or they ultimately default to the traditional strategy of growing for profit; there aren’t many examples to look up to or emulate. Investors in startups can be wary of alternative ideas, which means zebra companies might not get off the ground because they cannot get the funds, they need to prove their processes work.
Zebra companies also are stuck in an unfortunate situation where tax law tries to force them into one of two labels: for-profit and nonprofit. A business either can be taxed or be a deduction on taxes each year, and the tax system isn’t built to support a paradigm that strikes a balance between the two. This can be tricky for businesses to sort out.
Impact investing is a broader field than many skeptics think it is, and zebra companies can be found in many industries. While clean technology, microfinance, and health are great causes to champion via venture capital, the field could use growth in other sectors and industries that need it, such as journalism or education.
Zebra Companies and Falcons Rock
While venture capital serves an important purpose in the development of many new technologies and can be extremely profitable for risk-taking investors, a new type of venture capitalist structure is developing that invests in zebra companies with a longer-term, more nurturing and collaborative approach. Founding business owners who need capital but are not comfortable with the pressures and demands of new venture partners or are simply seeking to build a sustainable business, now have other choices available to them. While this is still a small segment of the venture capital industry, its growth is inevitable as the current structure is broken for many companies seeking capital.
Making a positive impact not only in the world but also in the investment industry itself is a tall order. There are institutions in place that won’t change overnight, and definitely not without serious effort from passionate people like you. Investors seeking a positive impact can turn to firms like Falcons Rock Impact Investments and Falcons Rock Investment Counsel for direction. We can help investors like you find the right investment vehicles for your financial situation, goals, risk tolerance and values. Learn more about our impact investing process to get started.